Plaintiff’s initial employment agreement contained a non-competition provision, which prohibited him from competing with the employer in the New York metropolitan area for 190 business days after the termination of employment. It also contained a non-solicitation clause in which he agreed not to service customers with whom he had worked at the company for 260 days.

 

Plaintiff was later promoted to a position in which he was responsible for the employer’s entire North American business, reporting directly to the CEO.  At that time, he executed two option agreements containing non-competition provisions that ran for one year from the date of termination.   Several years later, the employer ousted plaintiff from his position, limited his responsibilities, and in effect demoted him by requiring him to report to his replacement.

Thereafter, plaintiff gave notice of non-renewal of his employment agreement and preemptively sued the employer for a declaration that the non-competition and non-solicitation provisions in his employment and option agreements were unenforceable. The employer counterclaimed, alleging that plaintiff had breached his non-competition obligations.  After discovery was completed, each side moved for summary judgment.

 

A state-court trial judge in Manhattan found that after plaintiff was demoted, he no longer held the position for which the restrictive covenant provisions were intended, and that the employer’s demotion of plaintiff constituted a material breach of his employment agreement, thereby rendering his non-competition covenant unenforceable. The court also rejected the employer’s attempt to enforce the one-year restraint in plaintiff’s option agreements, in light of the employment agreement’s shorter 190-day covenant not to compete.  The employer’s agreement to the shorter restriction indicated that a longer period of restraint was greater than required to protect the employer’s legitimate interests, the court held.

 

The Appellate Division, in Manhattan, affirmed the trial court’s judgment on this issue. Fewer v. GFI Group, 124 A.D.3d 457 (1st Dep’t 2015).  The court found that the employer “did not have a legitimate interest in restricting [plaintiff] from working for a competitor once he was in his demoted position.”  There was no showing that plaintiff’s services, in the demoted position, were unique, or that plaintiff was in possession of any trade secrets or customer lists.  However, the appeals court did find that the employer might have a legitimate interest in enforcing the non-solicitation covenant, and remanded for a trial on that issue.  (The case was subsequently settled.)

 

Key takeaways:

 

  • An employer’s prior material breach of an employment contract may prevent enforcement of post-employment restraints in that same contract; and
  • Where non-compete provisions of varying lengths bind an employee, the existence of the restrictive covenant of shorter duration may hamper an attempt to enforce a longer one.